How Much Is It Worth to Preserve Dominion’s Nuclear Option?

Schematic of proposed North Anna 3 nuclear plant. Image source: Dominion.

Schematic of proposed North Anna 3 nuclear plant. Image source: Dominion.

by James A. Bacon

Perhaps the biggest question facing Virginia as it implements the Clean Power Plan, which mandates a 37% reduction in CO2 emissions from Virginia power plants by 2030, is what fuel mix to rely upon. Compelled to cut coal use sharply, Virginia’s power companies effectively have a choice of natural gas, nuclear and renewables such as wind and solar.

While not committed to building a third nuclear plant at North Anna Three, Dominion Virginia Power has spent hundreds of millions of dollars to create that option. But leading Virginia environmental groups have declared their all-out opposition to nuclear power, despite its zero carbon emissions. Then on Wednesday the Attorney General’s Office, which represents the interests of Virginia’s consumers, publicly stated that Dominion should abandon its nuclear initiative on the grounds of cost.

“How many hundreds of millions or billions of dollars does a company need to spend … before we can say we are planning to build this generation project?” said William Reisenger, an assistant attorney general, as reported by the Richmond Times-Dispatch. “Is there a threshold? Could Dominion spend $3 billion on a generation project without deciding whether it is building that project?”

At present, North Anna 3 is the third most expensive option for complying with the Clean Power Plan, Thomas P. Wohlfarth, Dominion’s senior vice president for regulatory affairs, acknowledged Wednesday in a hearing about Dominion’s long-range planning document, the Integrated Resources Plan. But that ranking could change. “All it takes is some variation on how the state decides to implement the plan, or decisions by other states, or a change in gas prices. You could very easily see a flip in the value where North Anna ends up being the lowest cost. … You can’t go all in on one fuel source.”

Framed this way, the question becomes how much is it worth to maintain diversified power sources for Virginia’s electric grid?

Dominion, like other electric utilities across the country, is increasing its commitment to natural gas. Gas is cheap (at the moment), it is virtually pollution free, and it has half the carbon emissions of coal. But there are legitimate questions how long it will remain cheap. No one is certain how long the Marcellus and Utica shale fields can continue to expand production, or how long supplies can keep pace with increasing consumption, especially after the U.S. starts exporting liquefied natural gas.

The main non-nuclear alternatives to natural gas are solar energy and wind power. In the past, those power sources have been exceedingly expensive, but improving technology has brought costs down. In Virginia, off-shore wind is still wildly uncompetitive in the near-term, and it appears that on-shore wind, sited mainly along mountain ridges, will be only a niche power source. The economics of solar look far more positive. The issue with solar, as with wind, is the intermittent nature of the power production. How much conventionally powered backup will be required, and what will be the impact, as solar becomes a major contributor, on electric grid reliability?

The strategic question Dominion is asking is this: Does Virginia want a future electric grid that relies largely upon natural gas, wind and solar? Or does it want to diversify its fuel mix with nuclear power to provide a stable base? Should the state roll the dice on two or three power sources or spread its bets to include nuclear?

The cost of nuclear is a huge consideration. According an expert witness for the AG’s office, North Anna 3 would cost in the realm of $19.3 billion, a sum that could increase customers’ electric bills by 25%. Irene Leech, president of the Virginia Citizens Consumer Council, declared the nuclear project “the biggest single threat posed today against the pocketbooks of Virginia consumers.”

Dominion spokesman Richard Zuercher says the AG office’s $19.3 billion estimate is “not unreasonable.” But it’s important to understand the context. That is not the up-front capital cost of building North Anna 3. The figure includes the cost of interest, which is paid out over decades. It also doesn’t take into account the fact that, once built, a new nuclear unit would likely have a 60-year life span, longer by decades than the life span of an investment in gas, wind or solar. All things factored in, will nuclear will be economically competitive? As Wohlfarth says, it all depends.

So, how much is it worth to maintain the nuclear option, not knowing whether it will ever be exercised? It’s not clear from the Times-Dispatch article where Reisenger with the AG’s office got the $3 billion figure. (I suspect it was a number pulled out of thin air for purpose of making a rhetorical point, not meant to be an authoritative cost projection.) Whatever the source, Dominion takes issue with it. Wrote Zuercher in an email late yesterday:

We disagree with the $3 billion stated by the witness in reference to how much the company could spend before committing to the new unit. The net capital spending to date is $278 million, net the $301 million that the Virginia General Assembly  allowed to be covered by existing rates, and does not include interest. It is more likely that spending on the unit could be in the $450 million range (net the write off) by the end of 2017, the year in which we expect the NRC to issue the license that would allow us to build and operate the North Anna 3.

Combining the $301 million “write-off” (what Dominion has already spent and is charging to rate payers) plus an additional $450 million, the total cost of preserving the nuclear option would be about $750 million. That’s about one-quarter the $3 billion figure cited.

Is the benefit of of preserving the nuclear option worth spending $450 million over and above the $301 million in sunk costs? If you’re dead-set against nuclear, no number is worthwhile. If your primary interest is holding down electric rates, maintaining system reliability and reducing greenhouse gas emissions over the long haul, reaching a judgment is a lot more complicated.

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21 responses to “How Much Is It Worth to Preserve Dominion’s Nuclear Option?

  1. Do these costs take into account the de-facto govt subsidy for insurance?

    If they do not – then we’re not really doing an apple to apple comparison with renewables.

    what you want to do with gas – is to use it as sparingly as you can to make it last as long as it can… and utilize wind and solar as much as you can – with the idea that at some point in the future – significant breakthroughs will occur not only in energy production but use.

    In other words – a novel concept – a “conservative” approach – not a go-for-broke, bet the farm on one or more unknowns.

    Nuclear might well end up being one of those breakthroughs.. and we should not preclude it as an option – but “maintaining” options with the current Nuke technology is not justified. We should be done with the current technology that can melt-down and even worse – plop it down on an active fault zone. Nothing about doing that makes any sense.

    Nothing keeps Dominion from adopting new nuke technology if/when it matures.. so spending money to maintain the current “option” does what? what does it really preserve?

    This is also an example of real regulatory stranglehold.

    NRC is so slow and ponderous in their approval process – they force companies like DOminion to “preserve” their option. Not good.

    • No one ever seems to take subsidies into account when talking about oil, gas, coal, nuclear, wind or solar. Proponents of each energy source point to the subsidies of all the others as justification for subsidies of their own. How the subsidies compare, I do not know. Indeed, I don’t know of anyone who has studied it. Surely someone has, but I don’t know of it.

    • Larry, no, the insurance under the Price Anderson Act, under which plants are indemnified, are spread among all the plants. There are some caps etc. It seemed like a good idea at the time it was enacted, and plants were seen as generally equivalent in risk, so spreading risk is a standard insurance procedure. There is a nuclear operators outfit which provide a little arms-reach review to assure no single plant undertake risks (such as, say, building on a demonstrated earthquake fault ahem) that would endanger the financials of the others.

      https://en.wikipedia.org/wiki/Price%E2%80%93Anderson_Nuclear_Industries_Indemnity_Act

      (What do you call a massive solar spill? A sunny day….)

  2. The question that should be answered by the SCC is: What relative mix of power generation projects will provide consumers with electricity that, over both the long- and short-term, will be affordable, safe and reliable? Especially in an information age economy, we need lots and lots of affordable electric power that can be generated in compliance with appropriate laws and regulations. As much risk as fairly possible should be placed on those who want to make money generating electricity. In return, they should be able to charge prices that provide opportunity to earn fair profits consistent with their business and financial risks.

    • The SCC is not empowered nor funded to optimize the mix of plants/fuel. They can review the IRPs.

      The U.S. and Virginia do not have an “energy policy”; they just nibble around the edges on regulation (tho I know the utilities don’t feel that way!), ensuring pricing fairness, environmental impact etc. – not the market.

  3. Jim, the “write-off” was directed by legislative amendment to Va. Code Section 56-585.1 A 6 during the 2013 Session of the General Assembly. The amendment directed that 30% of all costs to develop a nuclear plant incurred by a utility between 7/1/07 and 12/31/13 and all of the costs incurred thereafter could be deferred by the utility and recovered in the future in a rate adjustment clause. The remaining 70% of period costs were to be “written off” during the utility’s next biennial review. Writing off these costs suppresses Dominion’s earnings under review in its current biennial review that is now before the SCC and thus reduces the amount of rate credits Dominion will have to return to its customers.

  4. I currently feel Virginia should probably defer on nuclear until after 2030, to see how the other new plants develop including reliability. New nukes coming on-line in our general region include 2 in GA, 2 in SC, and 1 older TVA one being finished. North Carolina is considering going heavy on nuclear for CPP, I assume because that could allow NC (Duke) to keep some coal plants if they used a lot of nuclear to average down their CO2 emissions.

    Nuclear may have trouble competing with wind, in terms of off-loading the excess night-time power capacity. If there is a big build-out of wind power in the states north and west of Virginia, thanks to CPP and gov’t incentives, that could lower pay back on nuclear investments.

    I would like to hear from DEQ as soon as possible, Virginia’s options to meet the CPP goals. I know we have some Dominion analysis/forward plans.

  5. subsidies never mentioned for nukes – always mentioned for renewables.

    If Nukes were made responsible for liability – they would be uneconomic yet somehow we rationalize that they are needed while at the same time hold wind/solar to a different standard.

    Not playing favorites here – you’ve also heard me ask why if wind/solar are so great – virtually no island with a significant population has 100% installed wind/solar with diesel backup. why?
    most use imported fuel oil.. in generators that run 24/7 putting out electricity at abut 50 cents a kwh.

    take a look at Hawaii –

    http://www.hawaiianelectric.com/heco/Clean-Energy/Latest-Clean-Energy-News/About-Our-Fuel-Mix

    skip down to fuel mix

    even with Geothermal counted as renewable – they hover at 70% generation with coal and oil.

    solar accounts for 0.53% 0.14% 0.44% on 3 island
    wind much better at – 2.63% 11.94% 21.56%

    one would think of all places ideal for both solar and wind – islands would be just about goldilox…

    Fukushima cost 100 billion.. sounds kinda cheap.. If Surry or North Anna had an equivalent scale worst case- I can’t imagine 100 billion covering the costs.

    for scale – Virginia’s annual about is about 47b.

    • The largest single subsidy for nuclear plants is the federal loan guarantee. Without which no nuclear plant could be built in the U.S. Wall Street has given up on the economic feasibility of nuclear in the United States. As has General Electric. In 2012, Jeffrey Immelt, CEO of General Electric, the company designing the GE-Hitachi reactor that is being considered for North Anna Unit 3, told the London Financial Times, “It’s just really hard to justify nuclear, really hard . . . at some point, really, economics rule”. He went on to say that natural gas power plants and renewable energy such as wind and solar will be the best investments over the foreseeable future.

      The loan guarantee for one unit at North Anna would amount to $19-20 billion (or more). If the federal government had to make good on that guarantee it would be many times more than all of the federal ITC subsidies paid for all of the solar PV installed in the U.S. from its inception to the time the solar tax credit expires next year.

      The low penetration rate for solar in Hawaii is not a cost issue. As you recall, the co-op on Kauai is supplying 95% (soon to be 100%) of that island’s electrical needs via solar. The reason it is such a small fraction of that figure on the other islands is because they are served by investor owned utilities who have been fighting the move to solar in order to avoid stranded costs due to their investment in garbage burning plants and other oil fired facilities. Kauai calculated that their ratepayers (and owners) would be better off if they mothballed their diesel peakers and their 12 year-old combined cycle plant and relied on solar and a new battery storage facility to provide all of their service.

      In the Hawaii case, it was the shareholders versus the ratepayers and the shareholders won; which is essentially the case with North Anna 3. The ratepayers are being asked to swallow several hundred million dollars in costs from which they are very unlikely to receive any electricity.

      The costs for renewables (especially solar) is on a sharp downward trajectory (expected to be 50% cheaper within the next 5-6 years), while the costs for nuclear facilities only go up, usually way up. Consider that the North Anna unit is projected now to be 15-20 times the cost of an equivalent gas combined-cycle unit and within a few years the cost of solar will be less than the gas-fired units.

      Renewables have no fuel costs and the fuel cost of nuclear units is escalating rapidly. This also ignores the costs of spent fuel disposal (no depository exists in the U.S. even after 50 years of commercial nuclear power) and the costs of decommissioning (in the billions) which is charged to ratepayers every year during operation. It also ignores the very high level of CO2 released in the manufacture and construction of a nuclear facility. The projected small modular nuclear facilities are not yet technically feasible, let alone economically so. I told the president of our utility decades ago that the future of nuclear in the U.S. would not be killed by safety issues, but by economic ones. That has proven to be the case, even if some utilities have not yet realized it. Passing costs along to ratepayers will only postpone an honest appraisal of this option in the fuel mix.

  6. Question One should be, the demand target. Energy demand has plateaued throughout the developed world. (I have tons of EIA spreadsheets if you’re interested.) Energy efficiency – from buildings to appliances large and small (e.g., chillers) accrues.

    We will still need baseload power, but I ran some back-of-the-envelope numbers I shared with Jim, that the $19b for NAIII could generate a near-equivalent MWh in solar.

    • Excellent point. Energy efficiency is the lowest cost method of creating new energy supply, usually less than $2 /kWh, which is cheaper than than any other option, including renewables. Forward thinking utilities are remaking their business models to create a way to have demand respond to supply, rather than the historical habit of continuing to add to supply to meet demand.

      What is the business case for a nuclear plant which cannot variably be dispatched if night time wind has taken over the overnight baseload demand because it is considerably cheaper? Or excess daytime solar has already filled the pumped hydro storage facility.

  7. did I ask how it would be received if Dominion wanted to “reserve” 19B for wind/solar?

    bonus question – is it conceivable that sometime in the near future that a “study” will appear saying that shale gas is being depleted faster than originally thought – and we need to get a nuke in the construction pipeline quick?

    😉

    The only problem is that nukes are base load and gas can be used either way but it would be a monumental waste to use finite supplies of gas for base load – if there is nothing downstream to replace gas as a peaker fuel. what other fuels would be useable for peaker use?

    maybe that’s a strategic question – ” what is the primary fuel for peaker uses in 2030-2050?

    • Larry,

      The notion of “we need to get a nuke in the construction pipeline quick?”, is a contradiction. In the best of cases, a nuclear plant takes about 15 years from initial licensing to final construction. In the first nuclear plant to come on line this century (the TVA Watts Bar Unit 2 in early 2016) it will take over 40 years from start to finish.

      The best response to a supply shortage is energy efficiency. It is the cheapest and quickest. Solar also has a short lead time.

      The primary fuel for peakers, probably after 2025, will be some form of storage: batteries, flywheels, compressed air, or some other new technology. Since gas-fired peaking units are only used about 10% of the time, they last a long time and can be held in reserve. The new combined-cycle plants (which do not respond quickly to load changes) might face heavy competition from much cheaper renewables within 5-10 years, especially if natural gas prices increase, which is very likely.

  8. Jim, your last paragraph asks:

    Is the benefit of of preserving the nuclear option worth spending $450 million over and above the $301 million in sunk costs? Like you, I think keeping a nuclear option available is worth doing, but at what cost?

    You should be asking what that $750 million was being spent on? Was it necessary to spend 3/4th of a billion dollars to preserve the nuclear option? One of the big issues in the Dominion biennial review the Commission heard last month and in which briefs were filed by the parties yesterday, involved over $300 million in costs the Company hopes to “write off” in 2014, so its earnings and thus refunds to customers get reduced.

    What did the Company spend that money on doing? The Commission Staff found that nearly $60 million of this $300 was related to “site separation costs” to maintain facilities at the North Anna site that the Company recorded on its books as “plant in service,” because it was spent on items needed to keep operating the existing North Anna 1 and 2 units.

    Dominion keeps saying it hasn’t committed to build North Anna 3 yet. If that’s really true, why “separate” the site at all, let alone spend $300 million doing so?

    I think this is what the OAG wants to see examined.

  9. Until Dominion convinced the General Assembly to rewrite the rules governing how it is compensated, rate payers did not have to start paying for infrastructure until it went into service. Now Dominion gets a guaranteed higher rate of return that the SCC can adjust only on the edges, and gets to recoup the money as they spend it. Thus, the interest charges should be reduced as rate payers use the facility. Since the company knows it will get reimbursed for work done on this project, with that nice rate of return, its to its benefit to drag this thing out as far as it can, getting money from rate payers for years before they use the infrastructure. In changing Virginia law the risk has been moved from the company to the rate payer and unlike in the economy in general, the return was increased. That change set us up to have this situation facing us.

    It is also helpful to know that Virginia was one of few states that made rate payers reimburse companies for the partially constructed nuclear facilities that were never completed when the last building boom ended. So Virginia rate payers have already paid to have this unit partially built and then taken apart and paid over a long time, so lots of interest. Now rate payers are paying as the new reactor 3 is planned, even though it may never be finished.

    It’s time to say enough is enough.

  10. I would also challenge the statement that natural gas is virtually pollution free. It may burn to result in less carbon dioxide than coal, but if one considers the entire process of obtaining and using natural gas, it results in significantly higher methane emissions. Methane is an even more destructive greenhouse gas than carbon. It is emitted throughout the process of obtaining and using gas and compression stations are especially egregious emitters of methane.

    Natural gas is far from pollution free, especially when fracking is the method used to obtain it. Fracking results in water pollution, and unknown chemicals are forced into the earth with huge quantities of water. Replacing coal with natural gas just changes the nature of the pollution, it doesn’t result in clean anything. It also doesn’t avoid destruction of land and communities – whether it’s mountaintop removal or the environmental impact of fracking, there is tremendous destruction in both cases.

  11. Here’s one of a number of research studies from Cornell raising the concern about methane.

    http://www.news.cornell.edu/stories/2014/05/control-methane-now-greenhouse-gas-expert-warns

    • It is hard to expect a company to sell less of its product. But demand management, efficiencies large and small, grid improvements, tiered pricing should all be maxed out. – SCOTUS heard an important case this month, FERC v. ESPA, on whether FERC can support regulation of demand management or is it a state function – where the PUCs/SCCs sometimes ahem support the utilities.

      (There is a new Exec. Dir. of the Virginia Energy Efficiency Council; Chelsea Harnish. She is ace and I know will be taking on every practical strategy in this regard.)

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